Monthly Mop-Up

I'm not going to spend too long on this as I'd rather get to the 2006 Year In Review but I hate to short-shrift December, as it was a spectacular month!

After cutting back all short-term positions last week to "placeholders" I ended up with no real reason to close out 63 of them despite my reservations about going into a 4-day weekend with a lot of open positions.

We did decide to cover this morning with the DIA Jan $125 puts for $1 and those are, for good or ill, up a quarter already and if I were to apply that quarter to the basis of my existing contracts, we would be in amazing shape, but it's still open so we'll see what the weekend brings – hopefully by Wednesday I'll be adding a dime to the basis each of my existing calls!

So even though the calls are technically +.25 and we're reporting without, we are left with a very optimistic 63 open positions that average 16 days open (up substantially as we have taken few new positions and closed few existing ones) with an average gain of a ridiculous 81% due to a 2,150% gain on the AAPL Feb $80s (basis .10, profit $2.15) and a 1,450% gain on NKE (basis .10, profit $1.45) that are unusual due to very profitable sales against the positions that reduced the basis.

If I drop these down to a mere double the remaining positions are up just 27%, not counting the cover quarter, of course!

Our 22 long-term positions are another story entirely! Up a stunning 573% due to a ridiculous 11,000% gain on the PD $120 puts we took on 11/22 and have just a nickel basis in with a $5.50 profit. Throwing that one out we have "just" a 99% gain on 38 average days held. This is to be expected as the people who make real money in a choppy market are the people selling options, not the people buying them – and it is my job to teach you how to play the house!

In fact, 13 of our open short-term trades have contracts sold against them, the main reason we were able to let so many trades ride! You'll see when I write up the close of the "Forgotten Trades" virtual portfolio how powerful this model can be over the course of a year when managed properly.

We only closed 10 positions for the week including double on CHL, DD and HPQ that balanced out with wipeouts on CAKE, CC and SRE for a mere 11% gain over 21 days, our worst week in ages!

For the month of December we closed out a total of 83 positions for an 82% average gain on an average hold of 16 days. If I throw our my 2 highs (DALRQ 1,400% and XOM 700%) and 2 lows we end the month with a very respectable 62% average gain.

We only had 17 losers and 3 neutrals (always a recipe for success), and 20 positions that doubled or better.

Our biggest losers:

CAG Dec $25 puts (-100%, 11/6), which was a small (.20) bet that went the wrong way big and fast after a good start in early November!

PD Dec $90 puts (-98%, 11/17) – I sure didn't see that coming! The buyout killed us overnight but we turned it around nicely by grabbing the leap puts and letting some other sucker suffer our fat. We may have lost $2.50 on these but we're up $5.50 already on the $120 puts! This is part of my railroad system of investing – when you realize you are on a train heading the wrong way, stop fighting it!

CC Jan $25 calls (-93%, 12/12) – these and BBYs were a terrible sector play as they seem to be killing each other's margins but I still think the selling is overdone on both.

CAKE Jan $30s (-83%, 12/1) – New Year's resolution, no more stocks that begin with a "C"!

AEP Dec $40 puts (-80%, 11/13), SRE Jan $45 puts (-67%, 9/18) – I'm done with this sector! PEG was my worst trade of November so I'm just getting out of the utility game.

CHK Jan $32.50s (-64%, 12/8) – another C! This one was a cover though, so not really a loss.

QQQQ Dec and Jan $45s (-50%, 12/11) – any hope of recovery lies with the $43.63s which are currently flat at .50. This, like many of our biggest losers, would not have been so big if I just followed my own rules and stopped out with a 20% loss (kick, kick).

Fortunately, we also had some winning positions:

DALRQs Jan '08 $2.50s (+1,400%), 11/6) – at the time I said "I like the Jan ‘08 $2.50s for .05 rather than owning the stock. Let’s say I want to buy $10,000 worth for $1, that’s 10,000 shares. Suppose I am hoping to make 20% but it’s risky because they are bankrupt and could reorganize me out of my shares. So I buy 200 contracts for .05 instead, risking just $1,000, controlling 20,000 shares for 14 months and limiting my downside while freeing up $9,000 for more sensible plays." We picked up .75 on the mid-December spike and I sitll buy more whenever someone will sell me some for a nickel!

MGM Jan $37.50s (+710%, 6/28) – this was well played as we rode out the early dip by selling calls, which reduced our basis and then had the good sense to stop selling calls in September and start again on the November spike. This was a well-deserved 700% gain!

XOM Apr $80s (+700%, 12/7) – I'm very proud of this one as it was a cover play that let us ride out a big spike in oil but we called the top dead on and sold calls against it, reducing the basis to .10 but leaving the bulk of our insurance in place. We're back in these as a cover over this weekend…

HD Dec $37.50s (+229%, 11/30) – Rule # 1: Always sell into the initial excitement! We took that right off the table the next day, we might have done a bit bette, but we could have done a lot worse…

AXP Jan $60s (+173%, 12/8) – Not following rule number one here cost us an extra 50%!

DELL Dec $25s (+167%, 11/16) – Our current Dells are a roll of profits from this one. We didn't follow rules #1 but rule #2 (stop out when you lose 20% of your profits) saved us from giving it all back.

XOM Dec $75 puts (+141%, 11/30) – 2 double downs and half sold and applied to the basis was a long, hard road to a profit! A very nice save since we picked them up on the wrong day indeed.

QQQQ Dec $44 puts (133%, 12/6) – Just a momentum play – sometimes they work…

PFE Jan 25s (118%, 12/4) – We love it when people panic! How's this for hitting it on the head that morning: "It will probably be too late to short PFE in the morning but let’s pay close attention to a possible momentum play at the open and a possible call if we decide to be brave enough to call a bottom. I think $23.50 should be about right."

TOL Dec $30s (+114%, 11/28) – That was really good timing!

Notice some very important factors in our picks – they are diversified both in sectors and with puts and calls! I was very cautious all month and 9 of our losing positions were puts but I don't think I would have had the courage to keep the calls open without them so it's a trade-off I'm willing to make.

Exactly one-half of our closed positions were puts as my goal for the month was to protect us no matter what the market did and we certainly accomplished that mission. Just 1/3 of our open positions are puts and only 2 of our long-term plays so we can call that Phil's bullish percent indicator as I have cozied up to the market as the month wore on.